2008 (11) TMI 277 - AT - Income Tax

Block Assessment - Quantum of undisclosed income - Search And Seizure - Whether the addition could be made on the basis of a statement or affidavit given by the managing director for all the companies put together on an ad hoc or on a very general manner? - HELD THAT - Such an addition cannot be made under the facts and circumstances of the case especially in the absence of any evidence in the form of seized material and that too in the case of a block assessment. The AO should base his additions on evidence found - first appellate authority has rightly held that the statement under s. 132(4) would be evidence for the fact of inflation of the expenses, but at the same time it could not be evidence for the quantum of addition. Whether the addition in question does not fall within the ken of Chapter XIV-B for the reason that all these expenses are already recorded in the books of account prior to the search? - HELD THAT - The facts of the case are that the assessee himself not only agreed by way of a statement and affidavit that there has been inflation of expenditure and recording of bogus expenditure, but also filed a return disclosing certain expenditure claimed as expenditure in the regular books of account as undisclosed income. Sec. 158B(b) has been amended by the Finance Act, 2002 w.e.f. 1st July, 1995 wherein any expense, deduction or allowance claimed under the Act which is found to be false is defined as undisclosed income. When the assessee himself, suo motu declares undisclosed income under this category, it is not correct to argue to the contrary that the addition is not within the jurisdiction of Chapter XIV-B. Quantum of addition - HELD THAT - The AO has not furnished any basis whatsoever to come to the conclusion and to the quantum except relying on the general statement made by the managing director. To certain extent, the assessee has made certain analysis of unvouched expenditure and has produced some records before the AO, which give a particular percentage of expenditure as unsupported. In a block assessment no addition can be made unless material is found during the course of search. In other words, the addition should be based on material found during the course of search. As the AO has failed to bring out any evidence in support of the addition, we have no other alternative but to delete the additions made to the returned income - all the additions made to the returned income in all the companies is deleted. The appeals filed by the assessee are allowed and the appeals filed by the Revenue are dismissed.

Issues Involved:
1. Validity of additions based on statements and affidavits without corroborative evidence.
2. Applicability of Chapter XIV-B provisions to the expenses recorded in the books of account.
3. Legitimacy of ad hoc and estimated additions.
4. Relevance of seized material in making additions.
5. Quantum of undisclosed income and its apportionment among the companies.

Detailed Analysis:

1. Validity of Additions Based on Statements and Affidavits Without Corroborative Evidence:
The primary issue was whether the addition of Rs. 2 crores could be made based on the statements and affidavits of the managing director, Shri Sasi Kiran Janardhan Shetty, without any corroborative evidence. The Tribunal held that such additions cannot be made in a block assessment in the absence of any evidence in the form of seized material. The CBDT instructions emphasized that confessions during search operations should be backed by credible evidence. The Tribunal upheld the first appellate authority's view that the statement under s. 132(4) could indicate the inflation of expenses but could not determine the quantum of addition.

2. Applicability of Chapter XIV-B Provisions:
The Tribunal examined whether the addition of undisclosed income falls within the scope of Chapter XIV-B, given that the expenses were recorded in the books of account. The Tribunal rejected the assessee's argument, noting that the managing director admitted to inflating expenses and recording bogus expenditures, which were later disclosed as undisclosed income. The Tribunal referred to the amended Sec. 158B(b) and concluded that such false claims of expenses fall under the definition of undisclosed income.

3. Legitimacy of Ad Hoc and Estimated Additions:
The Tribunal addressed the issue of whether ad hoc and estimated additions could be justified. The assessee argued against such additions, while the Revenue contended that the managing director's admission justified the estimates. The Tribunal referred to the Andhra Pradesh High Court's decision in Rajnik & Co. vs. Asstt. CIT, which allowed estimation in block assessments. Consequently, the Tribunal rejected the assessee's argument against estimation.

4. Relevance of Seized Material in Making Additions:
The Tribunal emphasized that additions in block assessments must be based on seized material and credible evidence found during the search. The Revenue failed to provide such evidence, relying solely on the managing director's general statements. The Tribunal noted that the managing director's statement on 27th Dec., 2001, was qualified and not an unqualified admission. Hence, the Tribunal concluded that the AO's additions lacked a proper evidentiary basis.

5. Quantum of Undisclosed Income and Its Apportionment:
The Tribunal scrutinized the quantum of undisclosed income and its apportionment among the companies. The AO's reliance on the managing director's general statement and the lack of specific evidence led the Tribunal to question the basis of the AO's additions. The Tribunal noted discrepancies in the AO's remand report and found no positive confirmation of the percentages of unsupported expenditure claimed by the assessee. The Tribunal rejected the applicability of the A.P.L. (India) (P) Ltd. case, as the facts differed significantly. Ultimately, the Tribunal held that the AO's additions lacked proper legal evidence and deleted the additions made to the returned income.

Conclusion:
The Tribunal allowed the appeals filed by the assessee and dismissed the appeals filed by the Revenue, concluding that the additions made by the AO lacked proper evidentiary support and were based on general statements without corroborative evidence.

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